VAT Domestic Reverse Charge: Practical Advice from the Experts

Rhys Pattimore
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Looking ahead in to 2020, we spoke with the experts at Clear House Accountants and got their insight into a few of the struggles that face the building and construction industry.

If you’ve not read our article that focuses on the first of two issues, managing cash flow (and you certainly should), you’re likely here because you’re curious to learn about point two: VAT Domestic Reverse Charge (DRC).

Jibran Qureshi, Director at CHACC, highlighted DRC as an incredibly important change that businesses need to prepare for. Alongside cash flow, it’s perhaps the biggest issue that their firm sees as facing the building and construction industry, in terms of finance. 

At Commusoft, we've had enquiries from customers as well, which is why we prepared our previous article: What Does VAT: DRC Mean for Your Business?

While we’d still encourage you to speak to your own accountants and finance managers to seek advice, we thought it might be helpful to speak to the experts ourselves and gain a little more detail and advice to share.

So, alongside our infographic, which you can find at the end of the post, here are a few tips from our chat with CHACC that can help you understand a little more about DRC. Combined, take the necessary steps toward preparing for October 1st 2020*.

*(UPDATE: changes are now due to be implemented 1st March 2021).

  1. Don’t panic, there's still time
  2. The numbers you need to know
  3. Consider adjusting to monthly returns
  4. Heed the advice of the experts

1. Don’t panic, there's still time

As the original deadline (September 2019) for DRC loomed, there seemed to be a lot of panic about the adjustments, but this did waver, perhaps due to suspicion of the (eventual) delay to its implementation. But still, at Commusoft, we also received a flurry of calls (despite not being accountants) from our customers. 

First and foremost, our advice was to not panic. Second, was to speak to your accountant or financial advisor, which judging from CHACC’s (and no doubt other Accounting firms) experience, people began doing.

“Initially,” Jibran said, “it was a huge issue: we had to educate our customers in a short amount of time…clients were kind of panicking, but as soon as it was announced to be delayed, things calmed down...luckily, we now have one more year to do this.

We’re working hard to educate our customers on Domestic Reverse Charge; explaining how it works, what kind of things they have to implement to prepare” and make sure that even though, “clients aren’t now chasing us and asking questions, we’re still making the relevant resources to make sure that when the time comes, we [and so our clients] have everything up and running.”

That should be encouraging news for those of you who may still not quite be prepared. First, that you have time, and two, that if you’re unsure you can seek help.

This help can come from a number of sources, and as mentioned, HMRC continues to supply a wealth of advice, (part of which we’ve sought to redistribute with our infographic, downloadable below), and spread through conversations with customers and experts in the field of finance. You should certainly take action, but now you can digest, absorb, and act on the information, without rushing to plug gaps and risk making mistakes.

2. The numbers you need to know

So, how about some details you can work with? Well, when we asked Jibran for some practical advice, he was more than happy to share more precise details that you’ll likely find useful. 

The primary concern with DRC is the way it changes VAT being handled, so this means big changes to the way you manage your cash flow. That’s precisely part of the struggle that numerous accounting firms will be seeking to solve and assist businesses with. As Jibran explains...

“If they're within DRC,” [see the breakdown below], “suppliers are not going to be able to charge VAT anymore. Initially they had about 20% extra to play with for about three months, if they were doing quarterly returns, so now they're quite worried that they're going to lose that 20% chunk, which they could have used to buy materials, pay for work, or whatever, and offset that with the VAT. 

“The biggest concern is that businesses are going to lose that chunk of 20% extra cash they'd be getting to use to purchase equipment. And then obviously they'd pay, let's say on materials and stuff, they'd pay 20% extra on materials. So resulting net VAT they'd have to pay to HMRC would be smaller and that would give them a cash boost. But now, their cash flows lose that 20% chunk and they'd have to find some other source altogether, 20%. The cash flow issue is part of with we're trying to sort out…” 

image (1)For your business, being able to a set up a plan to understand cash flow projections and manage the changes in a smarter way, will help immensely. To go inline with that, there’s a particular bit of advice you may find useful:

3. Consider adjusting to monthly returns

So, you may be asking, just how do I cope with these changes? Obviously, they have the power to quite dramatically influence your cash flow and there are a number of challenges you face overcoming, like controlling stock, paying wages, and more besides. So, what des Jibran recommend?

“First, consider changing from quarterly to monthly VAT returns. What that does is: if you're paying for equipment or materials, you’re able to claim VAT within that month, whereas previously you'd wait for three months for a quarterly return. 

With the changes coming in, the net effect would be so small, you can’t really wait three months. So, instead, with the changes, you can convert monthly returns and if you're buying materials on which you are paying VAT, you can claim that immediately within that month. 

That’s just one solution we're looking at… but it will be viable because the idea is that you’re funding your materials purchased with that 20%, but now if you're not funding through that 20% and you're paying VAT on top, you don't want to waste three months to get a smaller return. 

So yes, it will still have a negative impact, but it’s a smaller, more manageable impact than if you buy materials and wait for three months.” 

This leads us to point 4, something we can’t stress enough:

4. Heed the advice of the experts

The best people who can help you, aside from HMRC, are those who manage your finances for you. If it’s just you, and you’re unsure of what to do, it never hurts to get additional advice. Approach an advisor who can help you (and also be sure to watch this webinar from HMRC).

For CHACC, their reaction to helping their customers should be particularly encouraging:

“We’re building guides for our customers. We're doing seminars, events too, to educate them, we're doing newsletters, online training for customers who quite far away. We’re setting up structures on accounting software, setting process to identify who DRC is applicable to and how to pick this up and building this within the processes.

We're doing a lot for DRC. A lot of training, lot of seminars, showing them how it works, showing them the potential impact of the new rules and what to do and figure out if it does impact the cash flow, then give them a cashflow solution.”

Best Practices Reverse VATThe point of content like this, and the solutions CHACC, and other accountants will be sure to produce, is designed to help our customers, partners, and business owners within the building and construction industry.

The changes are being made not to negatively impact the industry, but address problems and prevent those who might abuse the current system that’s in place. Like any change, it will take time to adjust to, but it’s all in partnership, together, to learn and educate each other, to the benefit of everyone. 

The Takeaway

Even though there have been delays in implementing DRC, originally in 2019 and then to 2020, but now 1st March 2021, it’s not an indication that businesses should take their foot off the peddle and simply wait.

On the contrary, when we spoke to Jibran, he said, as accountants for a range of industries who’ll be affected by the changes, they’re working incredibly hard to make sure they can help businesses prepare, and, so you should be doing the same, responsible thing for your business. After all, not having a contingency will only hurt your business if you don’t prepare!

For a summary of advice and guidance from HMRC, take a look at our infographic, which you can download for free below. In addition, as mentioned, we’d encourage you to speak to your own financial advisors and accountants, but it’s our hope that updates like this can at least help you get started, one way or another.

VAT: Find all you need to know about Domestic Reverse Charge

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